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MULTINATIONAL COMPANIES

The key points 1. What are Multinational Companies/Multinational

Corporations (MNCs)? 2. The benefits the MNCs bring to host nations 3. Potential negative impact on host nations 4. Can MNCs be controlled?

1. WHAT ARE MNCS?

A company which has operations (production or service facilities) in more than one country; BP (British Petroleum), Toyota, Ford, Sony, Vodafone, Starbucks etc. are examples of Multinational companies.

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2. THE BENEFITS OF MNCS TO HOST NATIONS • When an MNC sets up new premises in foreign nations, there is a transfer of capital, this is

called FDI (Foreign direct investment). o Immediate increase in resources available in the country, meaning that local

workers in construction and administration will spend in the local economy, such as buying local produce and services: boosting national income. However, this is short term.

o Long term benefits may include increase in national production, which ultimately means higher growth.

• Transfer of knowledge and technology: Good business practices such as methods of communication or knowledge of how to run a certain kind of business may be passed onto local companies, enriching them and making them more competitive.

o Local businesses in China and the UK copied their production techniques when Toyota and Nissan set up in manufacturing plants the country.

• Employment o Generally creates employment. o Sometimes, workers are trained and specialised, meaning that they can occupy high

level ranks in the MNCs base in that country More businesses are training local workers as they know the conditions of

their country best in contrast to imported high level officers from the core nation; greater productivity is attained.

o Trained workers may leave MNC to go and work in local business or set up their own. Spreading knowledge, enriching the country.

• Taxes o MNCs pay taxes o Often accused of paying as little tax as possible. o Use transfer pricing, meaning that they sell a product produced in one country

where taxes are high to another country in which it has operations, at an artificially low price. Thus the overall tax that the company is paying is lower. Like Sony manufactures the components for its LCD TVs in Japan, but

assembles the LCDs in Malaysia. • Greater consumer choice

o More choice means consumer happier. o This may push local companies to become more competitive.

• Exports o May increase host nation’s exports o Bringing in foreign revenue, which the country can invest into infrastructure and

imports • Economic growth

o All factors such as taxes, FDI, production, employment will aid the growth of an economy.

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3. POTENTIAL NEGATIVE IMPACT OF MNCS • Exploitation of poor countries

o These although not applying to all multinational companies does apply to some, as a lot of multinational companies are profit hungry.

o Pay extremely low wage rates, in the exploitation of cheap labour in developing nations such as India and China.

o Some MNCs employ child labour which is a violation of human rights under the UN, and as MNCs are mainly from developed nations, these practices would never be possible in the home nation.

o MNCs often exploit weak and corrupt government such as in Africa to extract natural resources with hardly any compensation going to the developing nations

o MNCs often bribe nations into evading taxes, which means that there is severe damage to the national income of a country.

• Often sell unsafe products o Toyota in the year 2010 had to do a massive re-call of the Prius Model hybrid cars

sold in America because the brakes did not work properly, although this was an unintentional mistake by the company, it had caused injuries and caused massive outcry over the scrutiny of safety tests.

• Damage to the environment o MNCs associated with the primary sector such as drilling for oil and mining for gold

and other precious metals have been criticised for their records. British Petroleum (in 2010), which had a huge oil leak in the Gulf of Mexico

near Texas caused a great environmental disaster, which cost the company billions in compensation, and caused irreversible damage to the ecosystem of that area.

The Exxon Valdez incident also claimed lives and had a large impact on the environment.

• Footloose capitalism o MNCs have the power to jump from producing in one country to another, creating

and destroying jobs and prosperity in their wake. MNCs can shift production from more developed nations where it is more

expensive to produce to nations with cheaper labour. This will leave a large number of jobless people and therefore the govt. has to spend more on unemployment benefits.

• Loss of national identity o Catalyses the embrace of the global culture, and causes damage to the preservation

of native culture and practices McDonald’s is often criticised as a threat to national cuisine and eating

habits. Ultimately leads to standardisation, which albeit does have advantages.

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4. CONTROLLING MNCS

Some businesses have a policy of CSR (Corporate Social Responsibility), in which the business acknowledges that it has a variety of stakeholders to whom they have different goals.

• Government regulation o Government can impose bans to prevent the potential disadvantages to the nation.

Government can prevent MNCs from logging in forests to prevent damage to natural habitats.

Government can have health policies that prevent food-chains like McDonalds from selling food with high amount of saturated fat, which is believed to be the main cause of cholesterol and obesity.

Governments can ban MNCs from using certain resources, which are unsustainable.

Government can implement a minimum wage which means it will make exploiting workers harder for MNCs.

o Competition policy Governments can prevent MNCs from dumping, to wipe out local

businesses; it can impose price policies on the company to prevent the loss leader strategy.

• Pressure groups o Environmentalists (from organisations such as Green Peace) in particular can mount

pressure on MNCs to stop damaging practices, such as logging in sensitive ecosystems, by organising riots and protests.